two simple models—the circular flow and the production possibilities frontier.



the difference between microeconomics and macroeconomics.



the difference between positive and normative statements.



the role of economists in making policy.



why economists sometimes disagree with one another.

CONTEXT AND PURPOSE:

Chapter 2 is the second chapter in a three chapter section that serves as the introduction of the text.Chapter 1 introduced ten principles of economics that will be revisited throughout the text. Chapter 2develops how economists approach problems while Chapter 3 will explain how individuals and countriesgain from trade.

The purpose of Chapter 2 is to familiarize students with how economists approach economicproblems. With practice, they will learn how to approach similar problems in this dispassionate systematicway. They will see how economists employ the scientific method, the role of assumptions in modelbuilding, and the application of two specific economic models. Students will also learn the importantdistinction between two roles economists can play: as scientists when we try to explain the economicworld and as policymakers when we try to improve it.

2

THINKING LIKE AN ECONOMIST

16

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Chapter 2/Thinking Like an Economist

KEY POINTS:

1.

Economists try to address their

subject with a scientist’s objectivity. Like all scientists, they makeappropriate assumptions and build simplified models in order to understand the world around them.Two simple economic models are the circular-flow diagram and the production possibilities frontier.

2.

The field of economics is divided into two subfields: microeconomics and macroeconomics.Microeconomists study decisionmaking by households and firms and the interaction amonghouseholds and firms in the marketplace. Macroeconomists study the forces and trends that affectthe economy as a whole.

3.

A positive statement is an assertion about how the worldis. A normative statement is an assertionabout how the worldought to be. When economists make normative statements, they are actingmore as policy advisers than scientists.

4.

Economists who advise policymakers offer conflicting advice either because of differences in scientificjudgments or because of differences in values. At other times, economists are united in the advicethey offer,but policymakers may choose to ignore it.

CHAPTER OUTLINE:

I.

The Economist as Scientist

A.

Economists follow the scientific method.

1.

Observations help us to develop theory.

2.

Data can be collected and analyzed to evaluate theories.

3.

Using data to evaluate theories is more difficult in economics than in physicalscience because economists are unable to generate their own data and mustmake do with whatever data are available.

Example: to understand international trade, it may be helpful to start outassuming that there are only two countries in the world producing only twogoods. Once we understand how trade

would work between these twocountries, we can extend our analysis to a greater number of countries andgoods.

2.

One important role of a scientist is to understand which assumptions one shouldmake.

3.

Economists often use assumptions that are somewhat

unrealistic but will havesmall effects on the actual outcome of the answer.

Chapter 2/Thinking Like an Economist

17

C.

Economists use economic models to explain the world around us.

1.

Most economic models are composed of diagrams and equations.

2.

The goal of a model is to simplifyreality in order to increase our understanding.This is where the use of assumptions is helpful.

D.

Our First Model: The Circular Flow Diagram

To illustrate to the class how simple but unrealistic models can be useful, bring aroad map to class. Point out how unrealistic it is. For example, it does not showwhere all of the stop signs, gas stations, or restaurants are located. It assumes thatthe earth is flat and two-dimensional. But, despite these simplifications, a mapusually helps travelers get from one place to another. Thus, it is a good model.

Activity 1—

Realism and Models: An Analogy

Type:

In-class demonstration

Topics:

Models

Materials needed:

Airplane kit, sheet of paper, whirl-a-gig wing toy (Note: the whirl-a-gig wing toy is a helicopter wing on a stick; it is often sold in museumgift shops as well as toy stores.)

Time:

5 minutes

Class limitations:

Works in any class size

Ask the class if a realistic model is better than an unrealistic model.

Show them the airplane model kit. Describe some of the details included in model (rivets,canopy, struts, etc.). Shake the box to rattle the large number of parts. This is a fairlyrealistic model, although obviously not a real airplane. Its complexity adds realism, but at acost; assembling the model is very time consuming. Drop the box on the floor. Tell the class,“This model, even when completed, cannot fly.”

qake a sheet of paper and fo汤 楴 楮to a paper a楲p污ne. phow the 捬css th楳 new mode氮 ftsv楲tues 楮捬cde s業p汩捩cy and ease of assemb汹I but 楴 楳 汥ss rea汩st楣ithan the a楲p污ne mode氠k楴. qhrow the airplane and explain, “While less detailed, this model can glide through theair.”

phow the students the wh楲lJaJg楧 w楮g toy. qh楳 mode氠汯lks noth楮g 汩ke an a楲p污ne–

just aqJshaped p楥捥 of wood. vetI th楳 mode氠does someth楮g that the other two mode汳 捡nnotdoW 楴 a捴ua汬y generates 汩ft. qh楳 toy demonstrates the same aerodynam楣i pr楮捩c汥s as a rea氠a楲p污ne w楮g. qw楲氠the st楣i between your pa汭s and the wh楲lJaJg楧 w楮g toy w楬氠f汹 overyour head.

b捯nom楣i mode汳 are 汩ke the wh楲lJaJg楧 w楮g toy. qhey are mu捨 汥ss 捯mp汥x than the rea氠wor汤I but they 捡n show how markets a捴ua汬y work.

18



Chapter 2/Thinking Like an Economist

1.

Definition ofcircular-flow diagram: a visual model of the economy thatshows how dollars flow through markets among households and firms.

2.

This diagram is a very simple model of the economy. Note that it ignores theroles of government and international trade.

a.

There are two decisionmakers in the model: households and firms.

b.

There are two markets: goods market and factor market.

c.

Firms are sellers in the goods market and buyers in the factor market.

d.

Households are buyers in the goods market and sellers in the factormarket.

e.

The inner loop represents the flows of inputs and outputs betweenhouseholds and firms.

Figure 1

Chapter 2/Thinking Like an Economist

19

f.

The outer loop represents the flows of dollars between households andfirms.

E.

Our Second Model: The Production Possibilities Frontier

1.

Definition ofproduction possibilities frontier: a graph that shows thecombinations of output that the economy can possibly produce giventhe available factors of production and the available productiontechnology.

2.

Example: a country that produces two goods, cars and computers.

a.

If all resources are devoted to producing cars, the economy can produce1,000 cars and zero computers.

b.

If all resources are devoted to producing computers, the economy canproduce 3,000 computers and zero cars.

c.

If resources are divided between the two industries, the feasiblecombinations of output are shown on the curve.

Figure 2

Spend more time with this model than you think is necessary. Be aware that themath skills of most of your students will belimited. It is important for the studentsto feel confident with this first graphical and mathematical model. Be deliberate withevery point. If you lose them with this model, they may be gone for the rest of thecourse.

You may want to include time dimensions for variables to make it clear that theproduction data are measured in terms of annual flows. This will help students torealize that a new production possibilities frontier occurs for each year. Thus, theaxes show the level of output per year.

20



Chapter 2/Thinking Like an Economist

3.

Production isefficient

at points on the curve. This implies that the economy isgetting all it can from the scarce resources it has available.

4.

Production at a point inside the curve isinefficient.

5.

Production at a point outside of the curve is not possible given the economy’scurrent level of resources and technology.

6.

The production possibilities frontier reveals Principle #1: People face tradeoffs.

a.

Suppose the economy is currently producing 600 cars and 2,200computers. To increase the production of cars to 700, the production ofcomputers must fall to 2,000.

7.

Principle #2 is also shown on the production possibilities frontier: The cost ofsomething is what you give up to get it (opportunity cost).

a.

The opportunity cost of increasing the production of cars from 600 to700 is 200 computers.

8.

The shape of the production possibilities frontier indicates that the opportunitycost of cars in terms of computers increases as the country produces more carsand fewer computers. This occurs because some resources are better suited tothe production of cars than computers (and vice versa).

It is useful to point out that the production possibilities curve depends on two things:the availability of resources and the level of

technology.

Be aware that students often have trouble understanding why opportunity costs riseas the production of a good

increases. You may want to use several specificexamples of resources that are more suited to producing cars than computers (e.g.,an experienced mechanic) as well as examples of resources that are more suited toproducing computers than cars (e.g., an experienced computer programmer).

ALTERNATIVE CLASSROOM EXAMPLE:

A small country produces two goods: corn (measured in bushels) and trucks. Points on aproduction possibilities frontier can be shown in a table or a graph:

A

B

C

D

E

Trucks

0

10

20

30

40

Corn

70

60

45

25

0

The production possibilities frontier should be drawn from the numbers above.

Students should be asked to calculate the opportunity cost of increasing the number of trucksproduced by ten:



between 0 and 10



between 10 and 20



between 20 and 30



between 30 and 40

Points inside the curve, points on the curve, and points outside of the curve can also bediscussed.

Chapter 2/Thinking Like an Economist

21

9.

The production possibilities frontier

can shift if resource availability or technologychanges.

Figure 3

You may also want to teach students about budget constraints at this time (call them“consumption possibilities frontiers”). This reinforces the idea of opportunity cost,and a汬ows them to see how opportun楴y 捯st 捡n be measured by the s汯le.A汳oI 楴w楬氠楮trodu捥 students to the use of a stra楧htJ汩ne produ捴楯i poss楢楬楴楥s front楥r⡷h楣i 楳 used 楮 Chapter P⤮ eoweverI be 捡refu氠楦 you 捨oose to do th楳 asstudents f楮d the d楦feren捥 between stra楧htJ汩ne and 捯n捡ve produ捴楯iposs楢楬楴楥s 捵rves 捨a汬eng楮g.

Activity—

Screwdrivers and Bloody Marys

Type:

In-class discussion

Topics:

Graphing, opportunity cost, tradeoffs

Materials needed:

None

Time:

10 minutes

Class limitations:

Works in any class size

Instructions

Draw a graph with Bloody Marys on the horizontal axis and Screwdrivers on the vertical axis.

A Bloody Mary contains tomato juice and one shot of vodka. A screwdriver contains orangejuice and one shot of vodka. Assume that we have plenty of orange juice and tomato juice,but only one small bottle of vodka containing 6 shots.

How many Bloody Marys can we make, if we only make Bloody Marys?

How many Screwdrivers can we make if we only make Screwdrivers?

Could we make 6 of both drinks? Why not?

On your graph, show all of the possible combinations of Bloody Marys and Screwdrivers thatcan be made, given a small bottle of vodka.

Points for Discussion

The combinations will make a linear production possibilities curve that is continuous since wecould make half drinks, quarter drinks, or any fraction of either drink.

Definition ofpositive statements: claims that attempt to describe theworld as it is.

3.

Definition ofnormative statements: claims that attempt to prescribehow the world should be.

4.

Positive statements can be evaluated using data, while normative statementsinvolve personal viewpoints.

ALTERNATIVE CLASSROOM EXAMPLE:

Ivan receives an allowance from his parents of $10 each week. He spends his entireallowance on two goods: ice cream cones (which cost $1 each) and tickets to the movies(which cost $5 each).

Students should be asked to calculate the opportunity cost of one movie and the opportunitycost of one ice cream cone.

Ivan’s consumption possibilities frontier (budget constraint) can be drawn. It should benoted that the s汯le 楳 equa氠to the opportun楴y 捯st and 楳 捯nstant be捡use the opportun楴y捯st 楳 捯nstant.

Ask students what would happen to the consumption possibilities frontier if Ivan’s allowance捨anges or 楦 the pr楣i of 楣i 捲eam 捯nes or mov楥s 捨anges.

Chapter 2/Thinking Like an Economist

23

B.

Economists in Washington

1.

Economists are aware that tradeoffs are involved in most policy decisions.

2.

The president receives advice from the Council of Economic Advisers (created in1946).

3.

Economists are also employed by administrative departments within the variousfederal agencies such as the Department of Treasury, the Department of Labor,the Congressional Budget Office, and the Federal Reserve. Table 1 lists theWorld Wide Web addresses of these agencies.

4.

The research and writings of economists can also indirectly affect public policy.

III.

Why Economists Disagree

A.

Differences in Scientific Judgments

1.

Economists often disagree about the validity of alternative theories or about thesize of the

effects of changes in the economy on the behavior of households andfirms.

2.

Example: some economists feel that a change in the tax code that wouldeliminate a tax on income and create a tax on consumption would increasesaving in this country. However, other economists feel that the change in thetax system would have little effect on saving behavior and therefore do notsupport the change.

B.

Differences in Values

C.

Perception Versus Reality

1.

While it seems as if economists do not agree on much,

this is in fact not true.Table 2 contains ten propositions that are endorsed by a majority of economists.

Use several examples to illustrate the differences between positive and normativestatements and stimulate classroom discussion. Possible examples include theminimum wage, budget deficits, tobacco taxes, legalization of marijuana, and seat-belt laws.

Table 1

Have students bring in newspaper articles and in groups, identify each statement inan editorial paragraph as being a positive or normative statement. Discuss thedifference between straightnews stories and editorials and the analogy toeconomists as scientists and as policy advisers.

24



Chapter 2/Thinking Like an Economist

2.

Almost all economists believe that rent control adversely affects the availabilityand quality of housing.

3.

While most economists oppose barriers to trade, the Bush Administrationimposed large tariffs on steel in 2002.

IV.

Appendix—Graphing: A Brief Review

A.

Graphs of a Single Variable

1.

Pie Chart

2.

Bar Graph

3.

Time-Series Graph

B.

Graphs of Two Variables: The Coordinate System

1.

Economists are often concerned with relationships between two or morevariables.

2.

Ordered pairs of numbers can be graphed on a two-dimensional grid.

a.

The first number in the ordered pair is the x-coordinate and tells

us thehorizontal location of the point.

Table 2

Figure A-1

Figure A-2

Emphasize that there is more agreement among economists than most people think.The reason for this is probably that the things that are generally agreed upon areboring to most noneconomists.

Many instructors may be unaware of how much trouble beginning students havegrasping the most basic graphs. It is important for instructors to make sure thatstudents

are comfortable with these techniques.

When reviewing graphing with the students, it is best to bring students to the boardto be “recorders” of what the other students say as you give a series of instructionslike “Drawa pie chart” or ask questions like “How tall should the bar be if the value is120 million?” Do not make the student at the board responsible for the answer.fnsteadI he or she shou汤 be s業p汹 re捯rd楮g what the other students say. ptudentsare often uneasy about graph楮g at f楲st and need to see that they are not a汯le.

Chapter 2/Thinking Like an Economist

25

b.

The second number in the ordered pair is the y-coordinate and tells usthe vertical location of the point.

3.

The point with both an x-coordinate and y-coordinate of zero is called the origin.

4.

Two variables that increase or decrease together have a positive correlation.

5.

Two variables that move in opposite directions (one increases when the otherdecreases) have a negative correlation.

The demand curve shows how the quantity of a good a consumer wantsto purchase varies as its price varies, holding everything

else (such asincome) constant.

c.

If income does change, this will alter the amount of a good that theconsumer wants to purchase at any given price. Thus, the relationshipFigure A-3

Table A-1

26



Chapter 2/Thinking Like an Economist

between price and quantity desired has changed and must berepresented as a new demand curve.

d.

A simple way to tell if it is necessary to shift the curve is to look at theaxes. When a variable that is not named on either axis changes, thecurve shifts.

D.

Slope

1.

We may want to ask how strongly a consumer reacts if the price of a productchanges.

a.

If the demand curve is very steep, quantity desired does not changemuch in response to a change in price.

b.

If the demand curve is very flat, quantity desired changes a great dealwhen the price changes.

2.

The slope of aline is the ratio of the vertical distance covered to the horizontaldistance covered as we move along the line (“rise over run”).

3.

A small slope means that the demand curve is relatively flat; a large slope meansthat the demand curve is relatively

steep.

E.

Cause and Effect

1.

Economists often make statements suggesting that a change in Variable Acauses a change in Variable B.

2.

Ideally, we would like to see how changes in Variable A affect Variable B, holdingall other variables constant.

3.

This is not always possible and could lead to a problem caused by omittedvariables.

a.

If Variables A and B both change at the same time, we may concludethat the change in Variable A caused the change in Variable B.

b.

But, if Variable C has also

changed, it is entirely possible that Variable Cis responsible for the change in Variable B.

Figure A-4

Figure A-5

Figure A-6

Chapter 2/Thinking Like an Economist

27

4.

Another problem is reverse causality.

a.

If Variable A and Variable B both change at the same time, we maybelieve that the change in Variable A led to

the change in Variable B.

b.

However, it is entirely possible that the change in Variable B led to thechange in Variable A.

c.

It is not always as simple as determining which variable changed firstbecause individuals often change their behavior in response to a changein their expectations about the future. This means that Variable A maychange before Variable B but only because of the expected change inVariable B.

SOLUTIONS TO TEXT PROBLEMS:

Quick Quizzes

1.

Economics is like a science becauseeconomists devise theories, collect data, and analyze thedata in an attempt to verify or refute their theories. In other words, economics is based on thescientific method.

Figure 1 shows the production possibilities frontier for a society that produces food and clothing.Point A is an efficient point (on the frontier), point B is an inefficient point (inside the frontier),and point C is an infeasible point (outside the frontier).

Figure 1

The effects of a drought are shown in Figure 2. The drought reduces the amount of food thatcan be produced, shifting the production possibilities frontier inward.

Figure A-7

28



Chapter 2/Thinking Like an Economist

Figure 2

Microeconomics is the study of how households and firms make decisions and how they interactin markets.

Macroeconomics is the study of economy-wide phenomena, including inflation,unemployment, and economic growth.

2.

An example of a positive statement is “higher taxes discourage work effort” (many other answersare possible). That’s a positive statementbecause it describes the effects of higher taxes,describing the world as it is. An example of a normative statement is “the government shouldreduce tax rates.” That is a normative statement because it’s a claim about how the worldshould be.

Parts of

the government that regularly rely on advice from economists are the TreasuryDepartment in designing tax policy, the Department of Labor in analyzing data on theemployment situation, the Justice Department in enforcing the nation’s antitrust laws, theCongressional Budget Office in evaluating policy proposals, and the Federal Reserve in analyzingeconomic developments (many other answers are possible).

3.

Economic advisers to the president might disagree about a question of policy because of differingscientific judgments or differences in values.

Questions for Review

1.

Economics is like a science because economists use the scientific method. They devise theories,collect data, and then analyze these data in an attempt to verify or refute their theories abouthow the world works. Economists use theory and observation like other scientists, but they arelimited in their ability to run controlled experiments. Instead, they must rely on naturalexperiments.

2.

Economists make assumptions to simplifyproblems without substantially affecting the answer.Assumptions can make the world easier to understand.

Chapter 2/Thinking Like an Economist

29

3.

An economic model cannot describe reality exactly because it would be too complicated tounderstand. A model is a simplification that allows the

economist to see what is truly important.

4.

Figure 3 shows a production possibilities frontier between milk and cookies (PPF1). If a diseasekills half of the economy's cow population, less milk production is possible, so thePPF

shiftsinward (PPF2).

Note that if the economy produces all cookies, so it doesn't need any cows, thenproduction is unaffected. But if the economy produces any milk at all, then there will be lessproduction possible after the disease hits.

Figure 3

5.

The idea of efficiency is that an outcome is efficient if the economy is getting all it can from thescarce resources it has available. In terms of the production possibilities frontier, an efficientpoint is a point on the frontier, such as point A in Figure 4. A pointinside the frontier, such aspoint B, is inefficient since more of one good could be produced without reducing the productionof another good.

Figure 4

30



Chapter 2/Thinking Like an Economist

6.

The two subfields in economics are microeconomics and macroeconomics. Microeconomics is thestudy of how households and firms make decisions and how they interact in specific markets.Macroeconomics is the study of economy-wide phenomena.

7.

Positive statements are descriptive and make a claim about how the world is, while normativestatementsare prescriptive and make a claim about how the world ought to be. Here is anexample. Positive: A rapid growth rate of money is the cause of inflation. Normative: Thegovernment should keep the growth rate of money low.

8.

The Council of Economic Advisers is a group of economists who consult with the president of theUnited States about economic matters. The Council consists of three members and a staff ofseveral dozen economists. It writes the annualEconomic Report of the President.

9.

Economists sometimes offer conflicting advice to policymakers for two reasons:

(1) economists may disagree about the validity of alternative positive theories about how theworld works; and (2) economists may have different values and, therefore, different normativeviews about what public policy should try to accomplish.

Problems and Applications

1.

Many answers are possible.

2.

a.

Steel is a fairly uniform commodity, though some firms produce steel of inferior quality.

b.

Novels are each unique, so they are quite distinguishable.

c.

Wheat produced by one farmer is completely indistinguishable from wheat produced byanother.

d.

Fast food is more distinguishable than steel or wheat, but certainly not as much asnovels.

Chapter 2/Thinking Like an Economist

31

3.

See Figure 5; the four transactions are shown.

Figure 5

32



Chapter 2/Thinking Like an Economist

4.

a.

Figure 6 shows a production possibilities frontier between guns and butter. It is bowedout because when most of the economy’s resources are being used to produce butter,the frontier is steep and when most of the economy’s resources are being used toproduce guns, the frontier is very flat. When the economy is producing a lot of guns,workers and machines best suited to making butter are being used to make guns, soeach unit of guns given up yields a large increasein the production of butter. Thus, theproduction possibilities frontier is flat. When the economy is producing a lot of butter,workers and machines best suited to making guns are being used to make butter, soeach unit of guns given up yields a small increase in the production of butter. Thus, theproduction possibilities frontier is steep.

b.

Point A is impossible for the economy to achieve; it is outside the production possibilitiesfrontier. Point B is feasible but inefficient because it’s inside

the production possibilitiesfrontier.

Figure 6

c.

The Hawks might choose a point like H, with many guns and not much butter. TheDoves might choose a point like D, with a lot of butter and few guns.

d.

If both Hawks and Doves reduced their desired quantity of guns by the same amount,the Hawks would get a bigger peace dividend because the production possibilitiesfrontier is much steeper at point H than at point D. As a result, the reduction of a givennumber of guns, starting at point H, leads

to a much larger increase in the quantity ofbutter produced than when starting at point D.

Chapter 2/Thinking Like an Economist

33

5.

See Figure 7. The shape and position of the frontier depend on how costly it is to maintain aclean environmentthe productivity of the environmental industry. Gains in environmentalproductivity, such as the development of a no-emission auto engine, lead to shifts of theproduction-possibilities frontier, like the shift from PPF1

to PPF2

shown in the figure.

Figure 7

6.

a.

A family's decision about howmuch income to save is microeconomics.

b.

The effect of government regulations on auto emissions is microeconomics.

c.

The impact of higher saving on economic growth is macroeconomics.

d.

A firm's decision about how many workers to hire is microeconomics.

e.

The relationship between the inflation rate and changes in the quantity of money ismacroeconomics.

7.

a.

The statement that society faces a short-run tradeoff between inflation andunemployment is a positive statement. It deals with how the economyis, not how itshould be. Since economists have examined data and found that there is a short-runnegative relationship between inflation and unemployment, the statement is a fact, thusit is a positive statement.

b.

The statement that a reduction inthe rate of growth of money will reduce the rate ofinflation is a positive statement. Economists have found that money growth and inflationare very closely related. The statement thus tells how the world is, and so it is a positivestatement.

c.

The statement that the Federal Reserve should reduce the rate of growth of money is anormative statement. It states an opinion about something that should be done, nothow the world is.

d.

The statement that society ought to require welfare recipients to look for jobs is anormative statement. It doesn't state a fact about how the world is. Instead, it is astatement of how the world should be and is thus a normative statement.

34



Chapter 2/Thinking Like an Economist

e.

The statement that lower tax rates encourage more work and more saving is apositivestatement. Economists have studied the relationship between tax rates and work, aswell as the relationship between tax rates and saving. They have found a negativerelationship in both cases. So the statement reflects how the world is, and isthus apositive statement.

8.

Two of the statements in Table 2 are clearly normative. They are: "5. If the federal budget isto be balanced, it should be done over the business cycle rather than yearly" and "9. Thegovernment should restructure the welfare system along the lines of a 'negative income tax.'"Both are suggestions of changes that should be made, rather than statements of fact, so theyare clearly normative statements.

The other statements in the table are positive. All the statements concern how the world is, nothow the world should be. Note that in all cases, even though they are statements of fact, fewerthan 100 percent of economists agree with them. You could say that positive statements arestatements of fact about how the worldis, but not everyone agrees about what the facts are.

9.

As the president, you'd be interested in both the positive and normative views of economists, butyou'd probably bemost

interested in their positive views. Economists are on your staff toprovidetheir expertise about how the economy works. They know many facts about theeconomy and the interaction of different sectors. So you would be most likely to call on themabout questions of factpositive analysis. Since you are the president, you are the

one who hasto make the normative statements as to what should be done, with an eye to the politicalconsequences. The normative statements made by economists represent their own views, notnecessarily your views or the electorate’s views.

10.

There are

many possible answers.

11.

As of this writing, the chairman of the Federal Reserve is Alan Greenspan, the chair of theCouncil of Economic Advisers is R. Glen Hubbard, and the secretary of the treasury is Paul H.O’Neill.

12.

As time goes on, you mightexpect economists to disagree less about public policy because theywill have opportunities to observe different policies that are put into place. As new policies aretried, their results will become known, and they can be evaluated better. It's likely that thedisagreement about them will be reduced after they've been tried in practice. For example,many economists thought that wage and price controls would be a good idea for keepinginflation under control, while others thought it was a bad idea. Butwhen the controls were triedin the early 1970s, the results were disastrous. The controls interfered with the invisible hand ofthe marketplace and shortages developed in many markets. As a result, most economists arenow convinced that wage and price controls are a bad idea for controlling inflation.

But it is unlikely that the differences between economists will ever be completely eliminated.Economists differ on too many aspects of how the world works. Plus, even as some policies gettried out andare either accepted or rejected, creative economists keep coming up with newideas.